Investment Shocks and Macroeconomic Co-Movement
20 Pages Posted: 22 Apr 2013
Date Written: August 31, 2011
Recent studies fi nd that shocks to the marginal efficiency of investment are a main driver of business cycles. Yet, they struggle to explain why consumption co-moves with real variables such as investment and output, which is a typical feature of an empirically recognizable business cycle. In this paper we show that within a conventional business cycle model, rule-of-thumb consumption provides a straightforward explanation of macroeconomic co-movement after a shock to the marginal efficiency of investment.
Keywords: Investment shocks, consumption, rule-of-thumb consumers, nominal rigidities, co-movement
JEL Classification: E32
Suggested Citation: Suggested Citation